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Warren Buffett Places One Heck of Bet on Energy

Between ExxonMobil, ConocoPhillips, Suncor, and Burlington Northern, Warren Buffett is making an enormous bet on Canadian oil sands.

Warren Buffett made big headlines in the energy space when Berkshire Hathaway(NYSE:BRK-B) publicly disclosed that it had accumulated a $3.4 billion position in ExxonMobil(NYSE:XOM). This alone is a pretty significant bet on the future of oil and gas. When you look at some of Buffett's other energy holdings, though, it points to a very specific investment strategy: Canadian oil sands. Let's take a look at Buffett's energy holdings and what makes all of them work.

Cornering the marketIn the Berkshire Hathaway holdings, there are three exploration and production companies: ExxonMobil, ConocoPhillips(NYSE:COP), and Suncor(NYSE:SU). The most obvious oil sands play among these three companies is Suncor, which is the largest oil sands producer and derives more than 66% of its 560,000 barrels per day of production from bitumen and upgraded oil sands. While Exxon and Conoco have extensive oil and gas operations across the globe, both are making large bets on Canadian oil sands as well.

ConocoPhillips, through multiple joint ventures, produced 107,000 barrels per day of bitumen from the Athabasca oil sands region. The company plans to expand that capacity to 314,000 barrels per day by 2017, which would represent about 15% of its total production target of 2 million barrels per day.

Between its ownership stake in the Syncrude project and its 70% stake in Imperial Oil(NYSEMKT:IMO), Exxon has more than 4 billion barrels of proven oil reserves in Canadian oil sands. This represents 37% of the company's total oil reserves on the books. Current production is slightly more than 200,000 barrels per day, but total production should ramp up to around half a million barrels per day as the Kearl oil sands facility reaches full production in 2020.

Oil sands make a lucrative investment given the potential for these facilities to be effective cash generators for decades. Unlike traditional oil production where extraction from a well is based on reservoir characteristics such as pressure, oil sands production more closely mimics mining operations. The Suncor presentation below gives a perfect example of how an oil sands project stacks in comparison to other oil and gas production methods.

Source: Suncor Investor Presentation

For Warren Buffett, it's hard to see a more attractive type of investment in the energy space.

The Keystone, but not the one you are thinking ofOne things holds back Canadian oil sands from being a more economically viable project: a lack of takeaway capacity. Much of the existing pipeline infrastructure between the U.S. and Canada is at capacity, and there is very limited pipeline access to the Canadian West Coast for export. Projects such as TransCanada's (NYSE:TRP) Keystone XL are designed to alleviate this problem, but the project has been awaiting government approval for five years now.

Yet despite this, oil sands are finding its way into the U.S., but on rail cars instead of via pipelines. Based on estimates from Scotiabank, oil shipments from Canada to the U.S. could total as much as 683,000 barrels per day within the next year or so. One company is expected to control a majority of the crude set to come into the U.S. by rail: Burlington Northern Santa Fe, a wholly owned Berkshire Subsidiary.

All but two of the rail links between the U.S. and Canada west of the Mississippi River are owned by Burlington Northern, which is more than likely to see the majority of oil sands traffic based on where those resources are located in Canada.

Source: Burlington Northern Santa Fe 10-K.

Another important point to note on Burlington's rail system is its access to the major refinery systems. This chart below breaks down the total U.S. crude oil imports by Petroleum Administration for Defense Districts -- better known as PADDs -- and the origin of those imports.

Source: US Energy Information Administration.

Not only is Burlington Northern's rail network able to access about 80% of the U.S. refineries that import crude, but it also provides an outlet for two critical oil regions in the nation: the West Coast and the Gulf of Mexico. The type of oil produced by oil sands is similar to the types of crude that we import from Venezuela, Mexico, and some of Saudi Arabia. Supplying these markets with oil sands via rail for less than the cost of these more expensive imports could be a massive boom for both Canadian oil sands producers and Burlington Northern. This adds up to a double win for Warren Buffett.

What a Fool believesThis is just another example of the genius of Buffett and his energy investments. Not only are these solid stand-alone investments, but combined they complement each other to make Berkshire Hathaway one of the biggest winners from the Canadian oil sands business. This is not the only time that a seemingly innocent Berkshire energy investment turned out to be a game changer, either. We may try to invest like Buffett, but these energy investments just go to show that he is still running circles around the rest of us.

Fool contributor Tyler Crowe owns shares of Berkshire Hathaway. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool.